Big market drops can rattle even the sturdiest investors. But while it may be tempting to cut your losses and sell, it’s generally a better idea—and potentially less stressful in the long run—to resist that urge.
Well, you might save yourself from some losses in the short term. But you’ll likely want to get back into the market again at some point. That’s because average stock market returns have been higher than those on bonds and savings accounts over time. So, investing in a mix of stocks is usually the best way to ensure that your savings beats inflation and you’re able to maintain your purchasing power.
If you sell when the market drops, how will you know when to buy again? It’s far easier to get that wrong than right and miss out on market gains. Simply riding out a bumpy market—instead of jumping out and in again—can save you the stress of trying to guess the perfect moment to get back into the game and the risk of missing out on gains.
Suppose you had $1,000 invested in stocks in October 2007, when Standard & Poor’s 500-stock index peaked before the Great Recession rolled in. After watching the index sink more than 30 percent, you sold in March 2008, pulling out your remaining $860 (based on index returns). Had you stayed invested when the bottom came in March 2009, your portfolio would’ve sunk to about $505—so your move to sell saved you from losing another $355.
But when would you have started investing again? It may have taken you awhile to believe the recovery was legit. So let’s assume you waited until March 2011. As of March 2018, your remaining $860 would’ve grown to a little more than $2,000. Not bad! Still, guess what? If you’d done absolutely nothing over that whole period, your portfolio would be almost $2,100 now.
Well, if you’d invested $100 a month since October 2007—despite all the losses—you’d have $27,350 by March 2018. So, yeah, over time that can pay off big time.
Of course, there’s no guarantee that history will repeat itself. But the stock market has recovered from every downturn and continued to climb. If you’re focused on long-term goals, riding out the bumps is part of the journey. Investing in a portfolio with a diverse mix of stocks should help you get through the hard times and mitigate losses. And if you’ve got the time and money to invest more, market drops can even be buying opportunities.